African PE executives: Collaborate to boost deal-flow
Private equity investment has reached pre-financial crisis levels in Africa. However, more deals could be executed if there was more collaboration between funds, private equity managers say, against the backdrop of a more challenging commodity-driven economic cycle.
Africa is seeing a resurgence in private equity investment after the gradual recovery from the global financial crisis, with funds investing $8.1 billion in African companies in 2014.
And as private equity flows into the region increase, the search for investable projects is on the rise, say fund managers at a private equity roundtable held by Euromoney. More collaboration between funds could help boost the number of deals.
"I believe there is power in network effects so, in order to reap the related efficiency gains, it is important to know what other funds are doing in the market – in terms of their respective investment criteria and mandates" says Yaw Keteku, associate partner at Vantage Capital, based in South Africa.
"We all review lots of pitches every week and the majority of them just won’t work for our funds. We all send the 'thanks but no thanks’ emails but I think it’s much more constructive for the companies seeking funding to be able to receive a referral to another fund whose investment mandate may be a better fit for their profile.
He adds: "While we meet informally at seminars and conferences, it would be good for us to sit down every so often in a more formal setting - such as a roundtable - to find out exactly where our expertise and mandates lie in relation to one another."
As Ngalaah Chuphi, partner at Ethos Private Equity, says: "To be completely honest, I don’t think we know much about each other’s portfolios, so we are missing out on possible cross-selling opportunities.
"It’s as if we guard our portfolio as something that nobody should know about. Whereas if we knew a lot more of what each other was doing, there could be ways that we could work to drive value into each other’s portfolio companies and collaboration becomes a win-win proposition."
He adds: "We shouldn’t be competing with one another. We have different strategies and we should be advising investors on who is the right person to partner with."
Funds invested $8.1 billion in African companies in 2014, the highest level since 2007 when funds raised $8.3 billion – according to data from the African Private Equity and Venture Capital Association – with first-time Africa-focused funds by Carlyle, KKR and Abraaj, among others, ramping up private equity investment in recent years.
According to EY, emerging markets have grown to encompass 20% of all private equity fundraising, up from 12% just five years ago, and Africa has moved from the seventh most-popular destination for private equity in 2011 to the first among investors surveyed.
With improving demographics, real GDP growth and increasing political stability, private equity investors are looking long-term to Africa.
Private equity investment is setting its sights further afield beyond the confines of South Africa and Nigeria, driven by the discovery of natural resources
Joshua Siaw, global partner and director of Africa practice at White & Case, says: "In the last few years, countries such as Ghana, Uganda, the Ivory Coast, Mozambique, Tanzania and Kenya have discovered large quantities of oil and gas.
"And there seems to be an increase in the interest from private equity investors in these countries – not only in the oil and gas assets themselves, but also in the surrounding services sectors. It is a trend we find quite interesting."
However, despite myriad opportunities and huge potential for growth, success in the sector isn’t guaranteed.
Buyout fund Atlas Mara – headed by ex-Barclay CEO Bob Diamond and Ugandan IT entrepreneur-turned-business magnate Ashish Thakkar – recorded a $63 million loss for the company’s first full year of operation as a result of takeover costs and provisions, trying economic conditions and a strong dollar.
"There is more competition at the higher end of the deal spectrum – at the level where a fund is looking to deploy equity cheques of above $50 million," says Ethos Private Equity's Chuphi."At this level there are fewer deals and those deals are normally disintermediated, hence pricing is sharper. And the concern is that some of these players are paying top prices for these assets."
Smaller private equity funds are more suited to the nuances evident on the continent, argue fund managers – especially when they work together:
"But sometimes, investors lack an understanding of the continent, and they don’t understand the focus and capabilities of local fund managers," says Richard Akwei, executive director and member of the executive committee at Musa Capital, a boutique private equity firm specializing on advisory and investments in sub-Saharan Africa.
"Most local fund managers are still not of sufficient scale to warrant the necessary due diligence required to make a small investment."
He adds: "And because African fund managers largely have not had many exits, the portfolios have not really been judged yet. Limited partners are struggling to find who is who, because there is limited data to quantitatively differentiate fund managers.
"It is unfortunate, but we are still early days into the African private equity market."